The new Government's plans to reform the Reserve Bank's mandate and its decision-making system in the coming months are important, but not as much as how the current board views the proposed changes and who it proposes as the new Governor. Bernard Hickey analyses the planned reforms and the key question of who will be the next Governor.
Just imagine you're the new Finance Minister and you've been elected with a mandate to change how the economy works. Now imagine that you have to find someone to manage a key part of that reform - but the group charged with selecting the candidate for you to either accept or reject believes there's no need for reform, and its members were themselves appointed by your political opponents.
That is the tricky situation new Finance Minister Grant Robertson now finds himself in. He has to find a new Reserve Bank Governor who wants to actively enact those reforms and change the culture of the bank, but the candidates for the job put in their job applications before knowing who their boss would be or what their job descriptions would be.
The problem for new Finance Minister Grant Robertson is that the Reserve Bank board has the power under the current Act to decide on a short-list for a new Governor and to put forward their choice for Robertson to approve.
Unlike in other countries, the Governor is not recruited and appointed directly by the Government. Normally that presents less of problem when the board is made up of appointees by the existing Government, but in the rare case (as we see now) when the Governor is changing at the same time as the Government, this creates the risk of a type of constitutional clash.
For example, if the board presented a candidate for the approval of the new Finance Minister that he didn't agree with, then he would have to reject the candidate and ask for a new one. That would look ugly, but may not solve the problem, given the existing board does not see a problem that needs fixing and could present another status quo candidate.
Then Robertson faces the really difficult decision. Should he push through an urgent change in the Act to give the Finance Minister the power to appoint the Governor directly? Or does he simply accept the status quo candidate for five years and hope that person will become enough of a change manager to get behind the likely changes of Reserve Bank's mandate, operating system and potential activities.
Robertson's choice about whether to accept or reject the board's candidate is shaping up as the biggest one of his first term and will have to be made within weeks.
He has been assured by the current board chair Neil Quigley that the candidates on the short list could manage the change process. But that is worth questioning, given the current board wholeheartedly endorsed the approach of its previous selection as Governor, Graeme Wheeler, and has issued annual reports saying there is no problem to fix.
There is also the question of what the candidates thought when they applied.
Applications for a new Governor closed on July 8. That was a time when few applicants could be sure who their boss would be or what the job description would be. July 8 seems an age ago in political terms. It was before the resignations of Metiria Turei, Andrew Little and Peter Dunne. At that time, most thought a change of Government or Act to be very unlikely. The shortlist was prepared before the make-up of the Government was known and well before the coalition agreements made clear that the Government wanted to reform the Act and the way the Governor made decisions.
A two-phased review
Robertson made that even clearer yesterday when he announced the terms of reference for a two-stage review of the Reserve Bank that is expected to shift its mandates and its decision-making structure into line with those of the Reserve Bank of Australia, the Bank of England and the US Federal Reserve.
Robertson announced the review on Tuesday as he signed an unchanged Policy Targets Agreement with acting Governor Grant Spencer. That agreement is expected to last until March 26 when Spencer retires. A new agreement would then be agreed between Robertson and the new Governor, assuming he approves the board's candidate.
He said the first phase of the review would aim to include a new mandate to maximize employment in the Reserve Bank Act alongside the current sole mandate of keeping inflation low around two percent. Robertson has not specified a level for what 'maximised employment' would look like, but has previously said he wanted unemployment to fall to below four percent, as it did during the last Labour Government.
The review would also look to introduce a committee-style system for decision making that included external voting members, which would replace the current system where the Governor is the single decision maker with no external advice.
The second phase would look at whether other unspecified changes are needed to the Reserve Bank’s operations, although Robertson said in a news conference he did not expect the review would lead to any currency targets for the bank. The New Zealand dollar rose after the announcements.
As an indication of the challenge Robertson faces, the terms of reference included a consideration of whether changes were required "to the role of the Reserve Bank Board as a consequence of the changes to the decision making model."
A review of the bank undertaken earlier this year by former State Services Commissioner Iain Rennie is also yet to be released. It was requested by the outgoing Finance Minister Steven Joyce and was completed in April, but has yet to be released.